At least, that's the opinion of Michigan law professor Adam
Pritchard, one of the top securities law professors in the
country and author of the authoritative text book,
"Securities Regulation: The Essentials."

Why now?

The answer is the Securities Exchange Act of 1934, rule
12g5-1(b)(3), of course.

For those not blessed with immediate and total recall of all acts
of Congress, let us explain.

The SEC requires companies with more than $10 million in assets
and 499 shareholders to register as public companies.

Importantly, this does not mean that these companies have to list
on the public markets, just that they have to disclose their
financials – stuff like profits, revenues, and top executive
hires and departures.

Today, it was
reported that Facebook has agreed to allow Goldman Sachs to
sell $1.5 billion worth of its stock at a $50 billion valuation
to high net worth Goldman clients. It's expected the private
offering will sell out.

Andrew Ross Sorkin
writes that "Goldman is planning to create a “special purpose
vehicle” to allow its high-net-worth clients to invest in
Facebook."

"While the S.E.C. requires companies with more than 499 investors
to disclose their financial results to the public, Goldman’s
proposed special purpose vehicle may be able get around such a
rule because it would be managed by Goldman and considered just
one investor, even though it could conceivably be pooling
investments from thousands of clients."

Let's go through Rule 12g5-1 of the Securities Exchange Act of
1934 for the answer.

(Bear with us. We promise securities law has never been more
dramatic.)

Rule 12g5-1 starts out sounding very optimistic for Goldman and
Facebook's plans. Section A reads…

"For the purpose of determining whether an issuer is subject to
[the 500 shareholder limit that would requirement it to disclose
financials] securities shall be deemed to be "held of record" by
each person who is identified as the owner of such securities on
records of security holders maintained by or on behalf of the
issuer, subject to the following…Securities identified as held of
record by one or more persons as trustees, executors, guardians,
custodians or in other fiduciary capacities with respect to a
single trust, estate or account shall be included as held of
record by one person."

Translation: A trust or corporation – or "special purpose
vehicle," in Goldman's parlance – can be considered a
SINGLE shareholder, even if it has multiple beneficiaries, as
Goldman's "special purpose vehicle" will. All the Goldman clients
who buy Facebook shares are "beneficiaries."

So far, Rule 12g makes it sound like Goldman and Facebook are in
the clear. Party for Mark Zuckerberg, who never wants to have to
share any of Facebook's financials!

But wait, Rule 12g5-1 goes on – with a twist!

Section B, paragraph 3 reads…

"Notwithstanding paragraph
(a) of this section…If the issuer [Facebook] knows or
has reason to know that the form of holding securities of record
is used primarily to circumvent the provisions of Section
12(g)
or 15(d) of the
Act, the beneficial owners of such securities shall be deemed to
be the record owners thereof."

Translation: BUSTED!

If the primary reason Goldman created the "special purpose
vehicle" was to avoid crossing Facebook's 500 shareholder limit,
then Goldman's many clients are all each considered individual
shareholders in the company.

Again: BUSTED!

Says Professor Pritchard: "If Facebook is selling to [Goldman]
knowing this is going to happen, then they are on their way to
having to register the company as a public company with the SEC."

A reminder: If Facebook is forced to register, it will not HAVE
to offer stock to the public. But since it will be forced to
disclose its financials anyway, we expect the company will go
ahead and offer up some second class (non-voting) shares.

Thanks to it's popularity on secondary markets and an SEC
investigation into that popularity, Facebook has finally resigned
itself to an IPO. It shopped the IPO to the major investment
banks.

Goldman won because it promised to raise $2 billion for Facebook
at an incredible $50 billion valuation. Smartly, Goldman decided
not to pour its own $2 billion into Facebook, but turn around and
offer its clients "pre-boarding" into the IPO through this
"special purpose vehicle."

It gets the IPO and a flashy product its private wealth clients
will go nuts for.